Pension tax relief under net pay, relief at source and salary sacrifice reaches you differently; low earners on net pay can get an HMRC top-up.

Pension tax relief: net pay, relief at source or salary sacrifice?

All three put an income tax saving behind your pension contributions, but at different moments and by different people. Relief at source means the provider tops up your pot once you have paid in. Net pay means payroll removes your contribution before the tax calculation. Salary sacrifice means you give up part of your pay, and the employer pays that sum into the pension instead.

You do not pick between the two tax-relief methods yourself, because the scheme and the legislation decide, so it is worth finding out which one yours uses before comparing anything else. Your own scheme may differ from the general picture here, and this page's short form lets an FCA-authorised adviser take you through it by telephone, free.

ArrangementWhere the saving comes fromWho has to actAlso worth knowing
Relief at sourceYour provider reclaims basic-rate relief from the government and credits it to the pensionNobody, for basic-rate relief; anyone paying higher rates claims the extraAn additional payment is added even if you pay no Income Tax
Net payYour contribution comes out of pay before income tax is calculatedNobody, usuallyPayroll cannot relieve tax you do not pay; HMRC pays a separate top-up to make up the difference
Salary sacrificeYour pay is reduced by agreement and your employer pays the amount inYou and your employer, by agreeing a change to your contractThe amount paid in is exempt from Income Tax, within the usual limits

The first two are tax-relief methods in HMRC's Pensions Tax Manual, which lists three: relief at source, net pay and a claim made to HMRC. Salary sacrifice is a different kind of arrangement, covered further down. Relief in general, including the earnings limit, is in the pension tax relief guide.

How does relief at source add tax relief to your pension?

Here you pay from income that has already been taxed, and the saving arrives afterwards. GOV.UK describes the mechanics this way: the basic 20% rate is claimed from the government by the provider, which puts it into the pot. HMRC's manual says the scheme administrator adds the relief to the member's fund.

GOV.UK says you get it "in all personal and stakeholder pensions, and some workplace pensions." So a personal pension or stakeholder pension works this way, while a workplace scheme might not.

For someone who pays no Income Tax, the position is different from net pay. GOV.UK says: "Even if you do not pay Income Tax, you’ll still get an additional payment if your pension scheme uses ‘relief at source’ to add money to your pension pot." How much a person with little or no income can pay in and still get relief is in the no-income guide.

Higher-rate taxpayers claim the rest themselves. GOV.UK works one through for the 2024 to 2025 tax year. A person on £60,270 who files a Self Assessment return puts £12,000 into a relief at source scheme, whose claim covers the first 20%. A further 20% can be claimed on £10,000 of it, the slice on which they paid 40% tax, and nothing extra on the other £2,000. In the tax year now running (6 April 2026 to 5 April 2027), GOV.UK lists the bands for England, Wales and Northern Ireland as basic rate on £12,571 to £50,270 and higher rate on £50,271 to £125,140, for someone with the standard Personal Allowance of £12,570. Scottish taxpayers have their own page: the Scottish relief guide.

What is a net pay arrangement, and who can use it?

Net pay is relief given through payroll. GOV.UK defines it as a scheme where "the employer takes your pension contributions from your pay before any tax is deducted." HMRC's manual says full relief is received up front: a £100 contribution means £100 comes off pay and goes into the scheme, with income tax worked out on what is left. The same manual says the member gets relief at their marginal rate of income tax, so a higher-rate taxpayer gets relief at that rate automatically.

Not every scheme can operate it. For a company scheme, the manual sets out criteria: the scheme must be an occupational pension scheme, the member an employee of a sponsoring employer, and every other employee contributing to the scheme must also be receiving relief through net pay. It adds that an employer cannot put one group of employees in the scheme on net pay and another group on relief at source.

Do low earners lose out under net pay, and what is the top-up?

Through payroll they can, but HMRC now pays a top-up to close the gap. Net pay relieves tax at the rate you actually pay, so a person whose income sits under the tax threshold gets nothing back that way, while relief at source adds 20% whether or not any tax was paid. HMRC's 2023 policy paper on the measure put the gap plainly: net pay gives relief at a person's marginal rate, and that rate can be 0%.

HMRC's Pensions Tax Manual calls the remedy the low earner's pension payment, an annual payment that "helps make sure low earners achieve similar outcomes whether their workplace pension scheme operates relief at source or a net pay arrangement." The duty to pay it is in section 193A of the Finance Act 2004. Since 14 July 2026, when the Registered Pension Schemes (Net Pay Arrangements) Regulations 2026 came into force, that section has required HMRC, so far as reasonably practicable, to pay anyone relieved under net pay the difference between the relief they got and the relief they would have had under relief at source. Before that change the law reached only people whose total taxable income was below the personal allowance, which is why older material, the 2023 paper included, describes it more narrowly.

How it works now, from HMRC's June 2026 employer bulletin and the amended law:

  • Who. Someone may be eligible if, in a tax year, they earned close to the personal allowance (HMRC says typically £12,570) and paid into a workplace pension through a net pay arrangement.
  • Which years. HMRC looks at each tax year separately from 2024 to 2025 onwards, and a person can qualify for more than one.
  • When. The law says the payment should follow as soon as reasonably practicable after the tax year in which the contribution was paid. HMRC said it would begin contacting around 1 million eligible people from August 2026.
  • How. Nobody has to apply. HMRC gets in touch by post or through the personal tax account, and the person follows its instructions to accept the money. The law also lets someone decline it, and an amount paid in error can be recovered as though it were income tax.

Where that payment leaves your overall income turns on figures only you hold; an adviser can talk them over with you, free, if you complete the enquiry form.

How does salary sacrifice give tax relief, and how is it different?

Salary sacrifice works differently: it changes who makes the payment. In HM Treasury's description you "agree to reduce your gross salary or sacrifice a bonus", and your employer puts the same amount into your pension. HMRC's PAYE guidance treats it as giving up part of the cash pay you are owed, normally for something other than cash.

For income tax, the Treasury confirms that sacrificed contributions stay exempt, as every pension contribution is, within the usual limits. GOV.UK's workplace pensions guide notes that in some cases it lowers the tax and National Insurance bills of employee and employer alike. Net pay and relief at source deal only with the tax, whereas salary sacrifice changes the pay your contract promises. The size of the saving is worked through in the salary sacrifice savings guide, whether it is worth it in the worth-it guide, and the effect on the annual allowance in the annual allowance guide. How employer contributions are treated for tax is in the employer contributions guide.

A change coming in April 2029

This is a future change, not a rule in force today. HM Treasury has announced a cap from April 2029: an employee's salary sacrifice pension contributions will escape National Insurance contributions on no more than £2,000 a year. Parliament has since legislated. Under section 1 of the Act that followed, the National Insurance Contributions (Employer Pensions Contributions) Act 2026 (Royal Assent 29 April 2026), the change takes effect from the 2029-30 tax year, and the first regulations made under it have to set the limit at £2,000. The Treasury has said more guidance will appear on GOV.UK before April 2029. What it means for different pay levels is in the Budget changes guide.

How can I find out which arrangement my pension uses?

Ask the people who run it. GOV.UK says that when you are automatically enrolled, your employer must write to you and tell you, among other things, "how tax relief applies to you". For salary sacrifice, GOV.UK's advice is short: "Ask your employer if they use salary sacrifice."

Net pay, relief at source and salary sacrifice: questions people ask

Is a net pay arrangement the same as salary sacrifice?

No. In net pay your employer deducts your contribution from gross pay and works out income tax on what is left, and the relief is the point of the arrangement. Salary sacrifice instead reduces the cash pay you are entitled to, in return for an employer payment into the pension. Both can lower the tax on your pay.

Can I choose between relief at source and net pay?

No. HMRC's manual says the member has no say: the method follows whichever one the law permits that scheme to run. If you want to know how an automatic enrolment scheme works, the workplace pension rules guide sets out the basics.

Do I need to apply for the low earner's pension payment?

No. HMRC's guidance says people do not need to contact it to receive a payment; those eligible should wait to hear by post or through their personal tax account. Because HMRC is writing to people about money they are owed, it warns that it will never ask for money transfers, PIN codes or passwords.

Do public sector pensions use net pay?

HMRC's manual says net pay may be used where the scheme is "a public service pension scheme (such as the Principal Civil Service Pensions Scheme or the Local Government Pension Scheme)" and the member is an employee. For how NHS pension contributions are relieved, see the NHS pension tax relief guide.

Do I need to declare salary sacrifice or claim relief on it?

GOV.UK's claim service lists who can claim, including a higher rate taxpayer that "pays into a personal or workplace pension". Whether a salary sacrifice arrangement leaves anything for you to declare is a question for your payroll team, or for an adviser, who will go through it without charge when you send the form below.

Your next step

Which arrangement you are in, what the low earner's top-up might mean for you, and how a smaller salary on paper sits next to your tax and State Pension all depend on your own figures. To have those pieces weighed in one conversation, put your number into this page's short form; there is no fee for the FCA-authorised adviser's return call. You can also ask your employer or scheme directly, or read the pension tax guide for the wider picture.

Sources